Economics

Three Economic Fallacies Pulled Apart by Henry Hazlitt – Randeep Singh

In Economics, there is a factor that is not seen in any other subject. It is because of this factor that Economics is much more vulnerable to misconceptions than any other study. The factor in question is one’s selfish motives. I learned about this after reading just the first few lines of the book; ‘Economics In One Lesson‘ by Henry Hazlitt.

There are quite a few aspects in Economics that peak my interest in the subject and to learn more about these aspects I have started reading books by famous economists from around the world. I was suggested to use this book as a starting point by countless articles online. It is mainly because this book is tremendously easy to understand and gives you the required push to venture deeper into the study of Economics.

Hazlitt has compiled all the prevailing fallacies engrained in the subject and has done an incredible job at making an average reader understand the criticality to dismantle these misconceptions immediately. Hazlitt has stated at the beginning of this book that the root of all the fallacies in Economics is due to the fact that people look merely at the immediate consequences of a policy on only a special group of people, and you will notice how all the fallacies in some way or another circle back to this statement.

In this blog post, I have listed out three fallacies dismantled by Hazlitt that I found to be exceptionally insightful.

Public Works Do Not “Create Employment”

In Chapter 4 of this book, it is pointed out that all public works require taxes and hence public work should be undertaken primarily to solve a problem faced by the taxpayers. The fallacy being discussed in this chapter is that government spenders exhibit public works as means to provide employment.

For example, a bridge is built with the taxpayers’ money which solves a traffic problem in the area. This construction would help the economy function better. It would save many people a lot of time on their daily commute, it would also make transportation of goods much easier and more efficient. This bridge is serving a purpose to the taxpayers and hence its existence is beneficial. However, when a bridge is built just to “create employment” government spenders start looking for all the places where a bridge can be built instead of places where a bridge must be built. They start pointing out the fact that the country would have been just as poorer if the bridge was not built and show how the workers now have employment.

The argument that employment wouldn’t have been generated otherwise is outright wrong. The bridge being created at a place where it could have been able to solve a traffic problem would have been the use of labor in a much more productive way. On the other hand, it is crucial to keep in mind that all public work is undertaken with the tax that is taken from the public. If we were not taxed for the building of the bridge our purchasing power would have been higher, and the public would have used this money to buy goods and services from other industries, hence creating employment.

The general public’s inability to look beyond the immediate and evident consequences leads to the argument being on government spenders’ side as all the construction workers can be seen being employed and the bridge can be seen to have come into existence by the “sheer power” of government spending. People also marvel at the fact that this bridge would not have been built and these construction workers would not have been employed if “obstructionists” had their way.

The Curse of Machinery

It is said that machines create unemployment as they push many workers out of employment, as a single machine is much more efficient at doing the same job. Hazlitt points out that the manufacturer who replaces a few workers at his factory with a machine is also creating employment. Firstly, the machine itself took some amount of labor to be made, and secondly, he has reduced his production costs, produces more goods than ever, and is making more profit than ever. The manufacturer will now have some extra money left with him which he can either invest in his industry or use for personal consumption of goods and services, this expenditure is also creating employment in other industries.

When this manufacturer’s competition notices how machinery is beneficial for business and increases the profit margin, they will also install similar machinery in their factories. This would overall result in a spike in the supply of goods in the market, if the product’s demand is elastic it would result in increased demand and hence lead to more employment in this industry. On the other hand, if in some cases the product’s demand is not elastic, the drop in price and increase in supply would mean that consumers have more money to save and use in buying goods and services from other industries, hence generating employment.

What machines do is that they bring an increase in production and standard of living by either making the goods cheaper or by increasing workers’ wages as it increases their productivity.

It is also argued that in some fields machines create employment.

Given below is a timeline of the American Automobile Industry showing the number of employees from 1910-73 to give you an example.

Credit Diverts Production

Hazlitt has expressed how government encouraging and guaranteeing loans can be harmful in the third chapter of his book. Hazlitt suggests that people agree with these types of government loans because they either look at the transaction from only the borrower’s perspective and keep only the granting of the loan in mind and not the repayment of the same.

Hazlitt favors the side of private lenders with the justification that private lenders are much more cautious when giving out loans to individuals. The money is entrusted to these private lenders by the general public and hence they cannot afford to lose the money on someone who would not be able to pay it back. He goes on to point out that the government lends the taxpayers’ money, money that wasn’t entrusted to them but was forcefully taken from the public. With lesser precautions, the government usually spends this money on some individuals who are a poorer risk and this leads to more money and resources being lost.

This hypothesis is where I slightly disagree with Hazlitt. As we discussed earlier, we have seen countless examples of bridges being built which do not benefit the public and are built for the sole purpose of generating employment. Doing away with all these fallacies at once is a utopian vision, and to make an economy more prosperous we should start focusing on small changes that are within our reach. If instead of making these purposeless bridges, the government spenders start giving out loans at a lower rate it would only be comparatively more productive and would help the government lookout for the public’s social welfare in some way. Giving long-term loans at a low rate of interest to the needy might be a poor risk, but is a risk and not a definite wastage. We have not been able to uproot the malpractices that are a complete waste of taxpayers’ money, so these low-interest loans are nothing but a slightly better alternative. Hazlitt’s argument is hundred percent spot on, however, I believe that to progress we must keep switching to the better alternative every day.

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